Is Lenders Mortgage Insurance a friend or foe?
Lenders Mortgage Insurance (LMI) is generally seen by investors as a costly expense to be avoided. But this view isn’t entirely accurate. Sophisticated borrowers understand that LMI can, in fact, be a valuable tool.
If you’re not familiar with LMI, it essentially involves a one-off insurance premium paid by the borrower to protect the lender’s interests in case the borrower defaults and the sale of the property does not cover the loan balance.
The premium varies depending on the size of the loan, the loan type and the level of deposit, but it can add up to thousands of dollars. Luckily, the amount can often be capitalised (added to the loan).
So how can such a thing be advantageous to an investor?
Firstly, with LMI you can borrow a higher percentage of the property value, beyond the normal 80 percent limit So, if you haven’t accumulated enough of a deposit, LMI will help you to get into the market sooner than you otherwise could.
In a growing market, getting in early can be a real advantage. Capital growth can quickly cover the expense of LMI and put you thousands of dollars ahead.
LMI could also help you to buy a better quality property than you otherwise could or allow you to buy additional properties with the same amount of equity.
Instead of paying a 20 percent deposit on the purchase of one property, you could potentially buy two properties paying a 10 percent deposit for each.
Whether or not LMI provides an advantage depends on your plans, circumstances and how quickly you want to build a portfolio. But in the right hands, it’s certainly not the ‘evil’ it’s often portrayed to be.
Bear in mind that the mortgage insurers regularly change their policies, so it’s best to check with your mortgage broker about current requirements and lending criteria.